shareholder taxation

The OTS review

The Office of Tax and Simplification (OTS) has made recommendations for changes to small company taxation, which would mean major changes for Limited Company contractors.

So what are these changes and what do they mean for small businesses? In this blog we explore everything you’ll need to know and how you could be affected.

What’s it all about?

A new taxation on shareholders rather than the company is just one of the new far reaching proposals set out in the latest OTS review. They’ve already considered unincorporated businesses and partnerships in previous reviews.

Proposal number 1: ‘Look through’

Most hard hitting is the proposal of the ‘look through’ company whereby company shareholders would be charged income tax on profits rather than paying corporation tax. OTS is considering the change further, as they believe it could simplify life for some small companies.

The question arises whether this form of taxation is voluntary or mandatory. If the principle of look through became mandatory this would have a dramatic negative effect on the flexibility contractors have on the level of income and the tax outcome.

Proposal number 2: Structural change

SEPA – which stands for the sole enterprise with protected assets – is the second revolutionary structural proposal by OTS. It’s essentially a new business entity, that’s effectively a trading model which will provide limited liability protection without the need for formal incorporation.

The practical use of a new model of this kind is questionable. It would require changes to tax legislation to be any use for contractors. Agencies and engaging clients are not inclined to use a self employed model due to the risk of liability for PAYE.

Simplified administration

A package of changes, including the streamlined, joined up registration and reporting process between Companies House and HMRC, would be welcomed. Limited Companies would also be pleased if PAYE and VAT filing and payment dates were aligned and a ‘truly digital’ service that would include prompts for contractors when filling out forms, were to be introduced.

Another area that would be welcomed would include HMRC providing extra evening and weekend support, to assist Limited Companies with their tax.

What’s next?

At present, the proposals within the OTS review are just that and are poised for the longer term. Government has asked the OTS to push ahead with further detailed work, suggesting that they are in favour of change. However, the general feeling in camp, is that just as many people are for the changes, as there are against them.

The OTS is intending to continue to develop this area and if you have an opinion you’d like them to know about, you can share it here.

Reducing the complexity of the corporation tax calculation, abolishing some tax allowances and potentially calculating on a cash basis are ideas for future development. The OTS has expressed their wishes for the government to push all three forward.

Intouch Accounting’s view

We are fundamentally against the principle of a look through company and believe that contractors should be entitled to distinguish company from personal money and tax should follow that principle.

The proposal for a non corporate limited liability model has definite attractions for freelancers but has no added value to Limited Company contractors. We would encourage the addition of a such a model for use where it is deemed appropriate. However, it must follow with appropriate changes to taxes to avoid restricting the market for work (by agencies and clients) for those using the model.

Looking to the future

The review recognised the increasing trend for people to be their own boss with many sole traders going Limited in order to limit their liability, enhance their professional credibility and formalise their business structure.

The proposals are bold and the implementation likely to be challenging. If ‘look through’ and SEPA are introduced, there is the potential for the majority of micro businesses to feel out of their comfort zone. Whatever changes are implemented to the small business sector, there will certainly be a large imprint left on the corporate market landscape.

This blog has been prepared by Intouch Accounting. While we have made every attempt to ensure that the information contained in this blog has been obtained from reliable sources, Intouch is not responsible for any errors or omissions, or for the results obtained from the use of this information. This blog should not be used as a substitute for consultation with professional accounting advisers. If you have any specific queries, please contact Intouch Accounting.